Thursday, November 01, 2012

Report Reveals Sound Corporate Governance at Venture-Backed Companies in US IPOs

Even though new public companies have phase-in periods within which to comply with stock exchange requirements regarding majority board independence, venture-backed companies incorporated in the United States and involved in recent U.S. initial public offerings had a majority of independent directors on their boards and most companies were substantially independent at the time of the IPO, according to a report released by Wilson Sonsini Goodrich & Rosati. Also, more of the companies separated the chairman and CEO roles than combined them.

Further, nearly all the companies surveyed had adopted, or planned to adopt, key corporate governance board policies in connection with the IPO, such as corporate governance guidelines, codes of business conduct, and related party transactions policies or procedures.

Almost all of the companies surveyed had board committees that were substantially comprised of independent members at the time of the IPO Frequently, board committees of the companies surveyed included members who were venture capitalists affiliated with venture funds that had invested in the companies, and, frequently, the venture capitalists were determined to be independent directors, notwithstanding their share
ownership.

Under the listing standards of both the NYSE and Nasdaq, stock ownership is one factor to be considered in determining independence, noted the report, but even significant stock ownership, by itself, is not a bar to a finding of independence. However, stricter SEC audit committee independence rules preclude affiliated persons of the company from serving on the audit committee. Affiliate status is measured by control, including stock ownership, and the SEC rules provide a safe harbor from affiliate status for audit committee membership at and below 10% stock ownership, while not specifying at what level of ownership such affiliated person status would necessarily obtain. The report examined whether directors affiliated with venture capital funds that had invested in the IPO companies were members of audit committees, and if so, whether they were determined to be independent. Of the companies that included venture capitalists who had invested in the company on the audit committee, 93.5 percent of the venture capitalists were found to be independent.

None of the companies surveyed adopted a shareholder rights plan, or poison pill, in connection with the IPO, although other defensive measures were liberally adopted. A growing number of companies included exclusive forum provisions in their governing documents. These provisions require that certain types of litigation, such as derivative suits, claims of breach of fiduciary duty, and claims arising pursuant to any provision of the Delaware General Corporation Law, be brought solely and exclusively in the Court
of Chancery of the State of Delaware, or another specified forum. Of the companies surveyed in the report, 93.3 percent are incorporated in Delaware.

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